How to Play Your Gold Stocks Now

After a year or more of depressed prices, gold and silver stocks
reversed with a vengeance. GDX (the ETF proxy for the Gold Miners Index)
was up in just two months (August and September). Those who followed
our lead and bought or averaged down this summer have profited
handsomely. It's been a fun ride, and I'm convinced we'll see many more
surges like this before it's all over.

What was perhaps
more important about the surge in gold stocks, though, was the leverage
they demonstrated, which is one of the primary reasons we invest in
them. Here's a comparison of GDX to GLD from August 1 to November 1.

(Click on image to enlarge)

This chart shows the advantage of building your position on dips. It lowers your cost basis and takes leverage to a higher gear.

So, what now?

First,
stocks ran far and fast, no doubt, and nothing goes up in a straight
line, even in a bull market. That's why the October lull wasn't
concerning to us.

Second, we also should consider seasonality.
Here's the updated monthly performance of gold stocks since the bull
market started in 2001, along with their year-to-date performance.

(Click on image to enlarge)

You'll
see that October is typically the weakest month of the year for gold
stocks. It wasn't surprising that the dip wasn't big this year, since
stocks had been weak most of the year.

It's the big picture, of
course, that we're most interested in. With the Fed, ECB, and BOJ
pulling stimulus rabbits out of the printing hat, and the UK,
Switzerland, and China all adding to their balance sheets, gold is
headed a lot higher and will subsequently pull the stocks with it.

Further, the seasonal pattern in stocks does not apply to gold.

(Click on image to enlarge)

On
balance, October is a strong month for our favorite metal, though that
wasn't the case this year. This is a good reminder that shopping season
could strike at any time.

For now…

---Maintain full exposure. Enjoy the ride, but don't be surprised to see a pullback, or at least
some consolidation. As the chart above shows, this is a strong time of
year for gold, so we want to be fully invested. In the big picture,
we've got a long way to go.

---Have your shopping list ready for whenever the next correction strikes. There's no crystal ball perched on our desk, but we know further pullbacks will arrive at some point, so be prepared to pounce.

---Consider taking a free ride if you're sitting on a large gain. Calculate the number of shares to sell to take your initial investment
off the table. Then your remaining shares are a "free ride," meaning
risk-free. If you go this route, do not sell your entire position; you could lose out on further gains.

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the bumpy waters of precious-metals investing is especially challenging
right now. With the right guidance, your investments can be positioned
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